The Durbin Amendment Turns Three

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May 15, 2013

Jason Hughey

Monday marked the three-year anniversary of the Senate’s passage of the Durbin Amendment as an attachment to the Dodd-Frank Act of 2010. The amendment prevented banks from charging more than 24 cents per debit card transaction. Before Durbin, banks were charging roughly 44 cents per debit card transaction. In the aftermath of the market crash, congressional leaders thought that this price cap would help struggling consumers.

Consequently, champions of the Durbin Amendment declared a victory for the American people. However, AFP opposed the Durbin Amendment. The victory for consumers was falsely proclaimed. Durbin’s amendment was actually a boon to retail companies who wanted the government to force debit card transaction costs downward. This did not change the real price of debit card transactions—that remained at 44 cents. Instead, it artificially lowered the price, leaving banks with a loss of 20 cents per transaction.

Because the Durbin Amendment ignored basic supply-and-demand economics, banks had to figure out how to cover their costs. In order to comply with the law, they had to figure out where to make up the losses. They found their answer in free checking accounts and debit rewards programs. According to the Heritage Foundation last July, the number of large banks offering free checking to their consumers declined from 96% in 2009 to 34.6% in 2011. In the months after the Durbin Amendment took effect, J.P. Morgan, Wachovia, and Wells Fargo also ceased offering debit reward programs.

None of these developments can honestly be called a victory for consumers. Using the federal government to “stick it to the banks” does nothing to help consumers. Banks have bottom lines that they have to meet. If the government tries to force banks to lower their costs in one service, they will have to eliminate or reduce some other service in order to comply.

AFP predicted this years ago. Our fatally conceited government thinks that the Durbin Amendment helped consumers. In reality, three years after the passage of the Durbin Amendment in the Senate, consumers are worse off. Punishing the businesses that provide services to consumers ultimately pushes costs onto consumers.

Information Center

Boom-bust cycles refer to periods of high economic growth followed by economic contraction, leading to either a recession or a depression. Many people assume that severe boom-bust cycles are a natural part of the free market. However, these cycles are much more complex.